People who have good credit take car loans and other types of financing for granted. But you don't have the same luxury if you've had some past financial problems that hurt your credit rating. You will have to take out a bad credit car loan if you must purchase a vehicle and cannot afford to pay in cash. It is more difficult to get this kind of loan, and bad credit car financing typically has several disadvantages.
Definition
A bad credit car loan is automobile financing extended to a consumer who has a low credit rating because of negative information on his credit reports. This is reflected in a low credit score as your score is based on the contents of your reports. Carbuyingtips.com explains that a borrower with a credit score below 680 is generally considered "sub-prime" and will need to find a bad credit car loan. If the person has a score below 550 he may not be able to find any financing at all.
Characteristics
Bad credit car loans have many characteristics that are unfavorable for the borrower. They have a higher interest rate than regular car loans given to people with good credit. Someone with a high credit score might qualify for special financing of three, two or one percent or even zero percent if the manufacturer is running a special deal. She will still get a good rate even if there are no specials. This varies based on current economic conditions, but it should be in the single digits. A bad credit car loan usually charges double-digit interest and may also require a fee for applying and other charges that desirable buyers do not have to pay.
Benefits
Bad credit car loans are usually viewed negatively because they are so expensive for the buyer. However, they do have benefits for both the lender and borrower such as making vehicles accessible to people who might not be able to buy a car otherwise. This can be a big help to someone with bad credit who desperately needs transportation to work, school or another important destination. Bad credit loans allow lenders to make more profit as long as the buyer does not default on the loan. Also, the high interest and fees compensate the lender for giving money to risky consumers.
Alternatives
You may have some alternatives to taking out a bad credit car loan. For example, you can get much better terms if a family member with a good credit rating is willing to cosign the loan for you. The other person will be fully responsible for the loan if you default, so it may be hard to find someone willing to take the risk for you. Your current bank or credit union might be willing to give you a car loan with better terms than lenders geared towards those with bad credit. Your odds will increase if you are a long-time customer and if you save up a large deposit to offset the lender's risk in making the loan.
You may be able to minimize the damage even if you're forced to take out a bad credit car loan. Philip Reed, a senior editor at Edmunds.com, explains that you may be able to refinance your car with a new lender at better terms after you build up a positive payment history for several months.
Warning
Carbuyingtips.com warns that many dealerships will tell you your credit is worse than it really is. This puts you in a defensive position and allows them to potentially arrange financing for you at a high interest rate. They make money from arranging financing such that a more expensive loan will give them more profit at your expense. Prevent this by checking your credit reports before looking to buy a car. They are available for free once each year from annualcreditreport.com.
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